Pay with Promises or Pay as You Go? Lessons from the Death Spiral of Detroit

Thomas Holmes () and Lee Ohanian

No 501, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: As part of compensation, municipal employees typically receive promises of future benefits. Motivated by the recent bankruptcy of Detroit, we develop a model of the equilibrium size of a city and use it to analyze how pay-with-promises schemes interact with city growth. The paper examines the circumstances under which a death spiral arises, where cutbacks of city services and increases in taxes lead to an exodus of residents, compounding financial distress. The model is put to work to analyze issues such as the welfare effects of having cities absorb pension risk and how unions affect the likelihood of a death spiral.

Keywords: City growth; Pay with promises; Death spiral; Retiree health benefits; Detroit; Defined benefit pension plans (search for similar items in EconPapers)
JEL-codes: H20 H75 R23 R51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014-07-14
New Economics Papers: this item is included in nep-age and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:501

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